Are Americans maintaining their new focus on increasing savings while lowering debt? Some economists think we'll keep increasing personal savings to a rate of about 8% of our after-tax personal income - consider that we haven't seen a rate like that since the early 90's (see graph below). However, in August, the personal savings rate fell for the third month in a row to 3% of disposable income as reported by the Commerce Department on October 1st.

Over the past several weeks there have been a large number of discussions and questions about the Savings Rate from both employees and customers which has prompted 1st Mariner Bank's Treasury Department to do some additional research. They have recently completed a White Paper on Personal Savings with focus on the Savings Rate to explain how it's calculated, what it means, what it predicts, and where it's going. Below is a rough version that highlights some of the main points of the White Paper. Be sure to send us any comments, questions, or feedback by using the comment feature at the bottom of this post.

What influences the saving rate? Before looking at what influences the saving rate, it helps to understand what makes up personal saving. So, first, what is personal saving and how is the personal saving rate computed?

The Personal Saving Rate (PSR) is the fraction of personal income that is not consumed. It represents personal discretionary income less personal consumption expenditures as a percent of personal disposable income.

Personal income measures income from employment, self-employment, investment income, dividends, and transfer payments such as Social Security. Income from wages is the largest component.

Total personal income is defined by the United States' Bureau of Economic Analysis as income received by persons from all sources. It includes income received from participation in production as well as from government and business transfer payments. It is the sum of compensation of employees (received), supplements to wages and salaries, proprietors' income with inventory valuation adjustment and capital consumption adjustment, rental income of persons with capital consumption adjustment (CCAdj), personal income receipts on assets, and personal current transfer receipts, less contributions for government social insurance.

Personal Consumption Expenditures (PCE) represent the actual and imputed expenditures of households and includes personal outlays for durable and non-durable goods, and services. It is essentially a measure of goods and services targeted towards individuals and consumed by individuals.

So the formulas for personal savings and the savings rate look something like this:

Personal Income

+ Wages and salaries

+ Supplements to wages and salaries (employer contributions for person, insurance and government social insurance)

+ Proprietors’ income with inventory valuation and capital consumption adjustments

+ Rental income of persons with capital consumptions adjustment

+ Personal income receipts on assets (interest and dividend income)

+ Personal transfer receipts (government social benefits)

- Less: contributions for government insurance

= Total Personal Income

- Minus: Personal current taxes

= Disposable Personal Income

Less:

Personal Outlays

+ Personal consumption expenditures

+ Personal interest payments

+ Personal current transfer payments to government and the rest of the world

Therefore, some of the factors that influence the savings rate include:
(as they relate to Disposable Personal Income)

Changes in personal income (i.e. wages) and the growth rate of personal income

Changes in interest rates, which affect investment income

Changes in corporate profits, which impact dividend payout rates

Changes in tax rates

And on the outlay side:

Increases or decreases in personal consumption expenditures,

Changes in interest rates and their impact on interest payments

Changes in current transfer payments.

Arguably, the two most important factors influencing the savings rate are personal wages and salaries, and the rate of personal consumption.

What has been the trend with Americans and saving over the past 50 years?

In terms of absolute dollars, savings have generally increased over the last 50 years with the exception of the last 10 years. However in terms of the saving rate (% of disposable income saved) personal saving has been on the decline up until the past year.

Going back even further you can see that since WW II, saving generally rose through the mid 70’s and then began a long period of decline over the next 30+ years.

The saving rate actually went negative during the Depression as households used savings as supplemental income. And the saving rate rose to over 25% during WWII.

There is a long period of a rising saving rate (from after WWII to 1974) and a long period of a declining saving rate (from 1975 to 2008). Some of the change in the saving rate was related to demographics. As the baby boomers entered the work force in the mid '70s, the savings rate declined as younger families typically save less.

However with the baby boom generation starting to enter their peak savings years (the boomers will start reaching their mid-60s in the next decade and beyond), many expect the saving rate will continue to rise (an aging population usually pushes the saving rate higher) and will do so at the expense of personal consumption.

So, for instance, if the saving rate rises to 8% by the end of 2010, as Pacific Investment Management Co (PIMCO) strategic adviser Richard Clarida expects, this suggests that real PCE growth will be about 1% below trend per year.

So with wages barely rising, and a rising saving rate suppressing PCE, many expect PCE growth to be sluggish for some time. And since PCE is usually one of the engines of recovery (along with residential investment), the economic recovery may be very sluggish as PCE accounts for roughly 2/3rds of total GDP.

The R-squared here is only .125, so there are other factors impacting PCE (like changes in income!).

But a rising saving rate does seem to suppress PCE (as expected). If the saving rate rises to 8% by the end of 2010 (as PIMCO expects), this suggests that real PCE growth will be about 1% below trend per year.

Some argue that the easing of credit availability that began in the 1980’s fostered in an era of lower saving rates. Financial disintermediation, which occurs when funds move out of savings banks and into short-term investments with higher interest-rate yields and asset securitization ushered in a period of rapid growth in consumer debt and coincided with a decline in personal saving. Likewise, the rise in residential real estate values in the 1990’s resulted in a sense of increased personal wealth, which further weakened the argument for the need for higher personal saving. Unfortunately, these paper housing profits were withdrawn by individuals in the form of mortgage equity withdrawals and further increased the debt burden on individual consumers.

The dramatic downshift in the economy found many Americans without a ‘rainy day’ fund. Millions of Americans lost their jobs and saw their 401(k) wiped out. It is unsurprising then to see that the trend of personal savings rate has been on a fast-pace decline since the mid 1980’s, reaching decade-low levels in recent years. The following graphic shows the trend of the personal savings rate per month from 1959 to 2009, along with an alarmingly opposing trend of rising consumer debt.

Personal savings rate is a key measurement of the amount of resources American households have available to contribute to the national saving. A low personal saving rate limits how much the nation can invest and so ultimately limits future economic growth.

As you look at the graph above, consider this: personal savings rate also correlates with Americans’ ability to sustain their rate of spending. Because personal spending represents about two-thirds of the U.S. economy, a low personal savings rate raises questions about whether Americans have adequate resources to withstand a financial emergency such as unemployment in the event of an economic downturn.

Despite the downward trend of personal savings rate in America, a change in money mindset has emerged from this recession. The personal savings rate has climbed to its highest level in the past 15 years, while U.S. consumer’s outstanding credit plunged in recent months. Having directly seen the impact of facing a recession without a cushion, many Americans are becoming thriftier and savvier in managing their money.

Considering the catalyst of this report was your questions and discussions with Mariners, we would like to continue this conversation. Please use the comments section below to ask questions, make a statement, or give some of your own personal insight. Basically, we want to hear what you have to say.

Today is an exciting day for us here at 1st Mariner Bank. It's the official launch of our new Savings Service called 'Set Your Savings.' So, you may be asking, what is a debit savings feature? Simply put, it's when a debit card purchase triggers a certain amount of money to be transferred from your checking account to your savings account.

I know, BofA and the Wacha' already do this, but ours is different and catered specifically for you. Who can keep up with a constantly changing amount transferred or $1.00 per transaction? That's too confusing and too expensive for my taste. So, instead of US determining how much money is transferred per each transaction, - like some of our competitors like to do -we have given YOU the say. That's right, you determine how much money (from $.05 to $1.00 in increments of $.05) is transferred into the savings account, allowing you to budget better and save as little or as much as you'd like. Now that is truly building a service just for you.

We know times aren't that easy and we understand that saving is now at the forefront of many customers financial concerns. This recession has shifted the habits of consumers from spending to saving and we plan on helping you develop an easy money saving strategy. So, to reward those who use Set Your Savings to help them save, we will match 10% of the amount that is transferred from your checking account to your savings account with a maximum of $250.00 annually. SWEET!

Not sure of how much you could be saving? No worries, we've created a great web page specifically for this new feature. On the page, there is a calculator that will allow you to see how much you could be saving each year if you enroll in the Set Your Savings feature. All you have to do is estimate how many purchases you make each week with your debit card and the amount you would like to transfer into savings. We'll do the magic math dance (don't ask) and show you an estimate of how much you could be saving.

Identity theft can still happen, which is why it is very important to know how to properly protect yourself. To date, there are many compaines that provide safety and security from identity theft, but the safest option still starts with you properly securing your financial information. A common means for thieves to steal your identity is through improper disposal of credit cards and their statements.

In the video below, Cynthia Drake demonstarates Bargaineering blogger Jim Wang's method for how to destroy a credit card properly which entails 15 precise cuts with a pair of kitchen scissors.